Sep 1, 2012

Can Markets Discipline Government Agencies?

The payoffs of weather derivative contracts depend on variables such as temperature and snowfall levels in the underlying city during the contract period. Chicago Mercantile Exchange (CME) has introduced several temperature related contracts on different U.S. cities in a staggered fashion over the past 13 years. We show that the introduction of these contracts on a city’s temperature improves the accuracy of temperature measurement by the dedicated weather station in that city in a causal manner. We argue that the introduction of temperature-based financial markets generates additional scrutiny of the temperature data measured by the National Weather Services (NWS), which in turn produces better outcomes by the government agency. Our results have important implications for the role of financial innovation and markets in affecting real outcomes (Purnanandam and WeagleyAugust 2012). 
I wonder about crime-rates derivative contracts, graduation rates, etc. 

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